Behind the Upheaval at Fidelity

Fidelity Investments remains the 800-pound gorilla of the mutual fund world, with $1.1 trillion of assets under management. But fund companies like Vanguard and American Funds are growing faster, which is why Fidelity this week intensified its makeover by replacing the manager of its most visible fund, the $52 billion colossus Magellan. Market-lagging Robert Stansky, who had headed the fund since 1996, has been replaced by Harry Lange, former manager of the Fidelity Capital Appreciation Fund.

Lange is a hot hand getting his shot. His Capital Appreciation Fund has risen 9.7% a year under his tenure, compared with an 8.4% average over the same period for the S&P 500. Still, now he must confront the Magellan pox: Stansky had also been one of Fidelity's hottest young managers when he took over the flagship fund in 1996, only to stumble badly. During his tenure Magellan rose 6.9% a yearcompared with an 8.1% gain over the same period for the Standard & Poor's 500.

Magellan, once the largest stock fund of any kind, has seen its assets shrivel to less than half its peak of $110 billion in 2000. It lost its biggest-fund title to the Vanguard Index 500 in April 2000, and isn't even Fidelity's largest fund todayit now trails the $56 billion Fidelity Contrafund. But Magellan remains by far the company's most visibleand hence most importantfund. During half of the years in the 1977-to-1990 tenure of the incomparable Peter Lynch, the fund recorded gains of more than 30%. To some of the company's core investors, Magellan is Fidelity.

The management switch at Magellan is yet another attempt to re-instill the kind of bold stock-picking of Lynch's heyday. "We have a very different business model than Vanguard or American," says Fidelity spokeswoman Anne Crowley. "Half our revenues come from non-fund, fee-related businesses like the brokerage business, where we are a significant player." Indeed, Lange is expected to emulate Lynch's method of mixing up the portfolio with some smaller companies. Even with the fund having lost half its assets, it remains a behemoth, which leaves Lange confronting the same hurdle that tripped up Stansky (and even Lynch in the very end): with so much money to invest he will be unable to buy enough shares of a hot small company to make much of dent on the fund's overall performance.

There is little doubt that Fidelity is feeling pressure from Vanguard, the low-cost fund company that specializes in passive index-fund investing as opposed to Fidelity's preferred style of active management. Index investing has soared in popularity. American Funds is a dominant provider of funds sold through financial advisers and has used that network to stoke its growth, as opposed to Fidelity, where only a portion of its funds are sold through advisers and which traditionally has relied on good performance so its funds stand out.

The Fidelity brass is trying to figure out how to keep its lead position in the industry, given the competitive landscape. In a further sign of upheaval in the fund giant, last May, Abigail Johnson  daughter of the company's founder  stepped aside from running the money-management arm of Fidelity. She also recently sold some of her voting shares of the closely-held firm, signaling to some that she may no longer be the heir apparent.